Cryptocurrency is the buzz word nowadays. One can find expert advice about investing or not investing in crypto currencies in every nook and corner. Many a times going by this kind of advice has resulted in teaching lessons instead of earning returns. People generally are perceiving crypto currencies in general and Bitcoins in particular as something which is capable of taking them from rags to riches.

But this is too good to be true. That is why today we are going to bust some myths about investing in cryptocurrencies by presenting the following strategies:

Cryptocurrency Investing Strategies

Here are the investing strategies that we will go over in this section:

·       Rupee cost averaging ( a.k.a. SIPs in mutual funds)

·       Balanced portfolio

·       Unbalanced portfolio

·       Profit reinvesting

1. Rupee Cost Averaging

Many people on the internet endorse this type of strategy heavily.

This approach means buying a fixed amount of cryptocurrency at regular intervals, similar to the SIP route of investing in mutual funds. One doesn’t even look at the price, one just buys to accumulate it for investment purposes after specific intervals of time.

For instance, let’s say that you like the long-term prospects of Ripple. On some coin exchange, it’s easy to setup a schedule to buy a certain amount of Ripple every month.

You could setup a schedule where you purchase of ₹100 of Ripple on the first day of every month.

For whom is this strategy is suitable?

This strategy is for you if you want to invest in cryptocurrencies for the sake of investing. Or simply put, you don’t want to miss out on this latest fad. You may forget to check the charts and want it all automated.

But frankly speaking, that’s just being lazy.

Yes, Rupee cost averaging would have worked very well over the past year. But that is only because we saw the prices climbing ever high peaks, across almost all cryptocurrencies in the previous one year.

As the trade in modern days digital currencies become more active, Rupee cost averaging becomes more risky.

Here’s why?

Downsides to this Strategy

For the small amount of time that Litecoin has been actively traded, we have seen deep troughs in price graph. One example is the drop marked here with the arrow.

It went from $38.95 to $19.36, prices dropped to a level which was half the prices trading few days back44!

If you had bought $500 worth of Litecoin and saw it drop to $250 in a matter of a few weeks, would you still stay in? Maybe.

Anyone would freak out in such panic situations, and rightfully so. That’s not good risk management. It’s a much better investment to try to get in near $19.36 because that minimizes your downside. Could it drop more? Of course.

However, you just eliminated about $20 of downside, simply by waiting for a better place to get in.

2.  Balanced Portfolio

In this strategy, you would purchase the same Rupee amount of each currency that you are investing in.

So if you are investing in:

·       Bitcoin

·       Monero

·       XRP (Ripple)

·       Dash

…and you have ₹1,000 to invest, you would allocate ₹250 to each currency. Any subsequent investment would be divided equally between the four currencies.

You would wait for the price to form a Baseball Cap (as described above), before you buy each one.

Who this Strategy is For?

If you want to build a diversified portfolio of coins, but you aren’t sure which ones will do well, then this is the strategy is for you. It gives you exposure to a few currencies that have the best chance of succeeding at a good price.

Drawbacks to this Strategy

With this buying strategy, you would fail to maximize your investment in the currencies that will outperform the rest. But since you can’t be absolutely sure of which ones will be successful, this strategy gives you good diversification.

3. Unbalanced Portfolio

To take advantage of the currencies that you think will do the best, you could use the Unbalanced Portfolio Strategy. In this strategy, you would allocate every investment by how well you think each currency will perform.

For example, if we use the same portfolio as above, you might have the following allocations:

·       Bitcoin (60%)

·       Monero (25%)

·       XRP (10%)

·       Dash (5%)

If you think that Bitcoin will perform the rest over time, then it would make sense to invest a majority of your money in it.

Each subsequent investment would be distributed according to these predetermined percentages.

And of course, you would not buy each currency until you see a Baseball Cap. 

Who is this Strategy For?

This is for investors who have done extensive research into currencies and have a very good idea of which ones will perform well. The previously decided percentage allocation to each currency can change over time, but be sure that you have a very good reason to make the change.

Drawbacks to this Strategy

The only downside is that you could get the allocation wrong and invest too little in the best performing currency. So only use this strategy if you are reasonably sure of your predictions.

If not, then the Balanced Portfolio Strategy would be best.

4. Profit Reinvesting

Once you have a solid portfolio of currencies and you are in profit, you can start to branch out to other currencies that have better prospects as we have seen that this space of digital currencies is highly uncertain and every day we see new and promising players emerging in the market.

For example, let’s say that you bought 3 Ether coins for $52 each. As I write this, Ether is at $368.

So your total profit is:

3 x $52 = $156

3 x $386 = $1,158

$1,158 – $156 = $1,002

Now, let’s say that you really like the potential of the Ripple Network. You could take half of that $1,002 profit and invest it in XRP.

By using this strategy, you can leverage your gains to make higher returns and diversify your portfolio.

In order to get the most out of your current profits, you should look for times when price goes parabolic. This type of price action is unsustainable, so it’s best to cash out some of these gains, before price drops again.

Remember to lock in your profits, so you can keep your money readily available to take the next trade.

Who is this Strategy For?

Reinvesting your profits is a great strategy for investors who only want to make a very limited investment in cryptocurrencies. If you are skeptical that cryptocurrencies will actually survive, then only expanding your portfolio when you see results, is a great way to grow your initial investment.

Downsides to this Strategy

You might miss out on great investments if you have to wait for your current portfolio to show you a profit. In addition, you are taking money away from currencies that are actually showing a profit.

The next investment may not be as good, so don’t spread yourself too thin!

Happy investing!

Disclaimer: the views expressed here are those of the author and do not reflect the views of Groww.